Problem
Comfi Airways, Inc., a small two-plane passenger airline, has asked for your assistance in some basic analysis of its operations. Both planes seat 10 passengers each, and they fly commuters from Comfi's base airport to the major city in the state, Metropolis. Each month 40 round-trip flights are made. Shown below is a recent month's activity in the form of a cost-volume-profit income statement.
Fare revenues (400 fares) $45,300
Variable costs
Fuel $14,903
Snacks and drinks 790
Landing fees 1,850
Supplies and forms 1,030 18,573
Contribution margin 26,727
Fixed costs
Depreciation 2,990
Salaries 14,972
Advertising 380
Airport hanger fees 1,600 19,942
Net income $6,785
(a) Calculate the break-even point in (1) dollars and (2) number of fares. (Round answers to 0 decimal place, e.g. 1,225.)
(b) Without calculations, determine the contribution margin at the break-even point.
(c) If fares were decreased by 10%, an additional 100 fares could be generated. However, total variable costs would increase by 20%. (Round answers to 0 decimal place, e.g. 1,225.)
(1) How much would net income be impacted by this change?
(2) Should the fare decrease be adopted?